3 Undervalued Dividend Champions With High Return Potential

  • These dividend champions are undervalued and offer the potential of high returns.
  • Stryker (SYK): Updated guidance paints a pretty picture for this medical device producer.
  • Dover Corporation (DOV): This manufacturer has the second-longest dividend streak among U.S. companies.
  • Polaris (PII): Revenues continue to grow even amid rampant inflation and supply-chain disruptions.
dividend champions - 3 Undervalued Dividend Champions With High Return Potential

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Income investors sometimes take the route of finding the best income stocks to meet their needs based upon criteria like dividend safety, dividend growth potential or historical dividend streak. These can help investors find great dividend champions that will provide them with years of income.

Along with dividends, investors should also keep in mind capital appreciation potential to go along with the dividend income. This can be done by selecting great dividend stocks that also represent deep value. These stocks, in our view, provide a one-two punch of not only a strong income stream but the potential for a significant amount of capital appreciation as well.

The following three dividend champions are undervalued, and also have high dividend yields leading to high total return potential.

SYK Stryker $209.55
DOV Dover Corporation $120.17
PII Polaris $102.10

Stryker (SYK)

The Stryker (SYK) office in Fremont, California.
Source: Sundry Photography / Shutterstock.com

Stryker (NYSE:SYK) is a global leader in the medical device sector. The company’s product lines include surgical equipment, neurovascular products and orthopedic implants.

The company has continued to generate growth in 2022, even in a difficult macroeconomic environment. In the most recent quarter, Stryker’s revenue grew 4.6% to $4.49 billion. Adjusted earnings per share (EPS) of $2.25 was flat year-over-year (YOY). Organic revenue was up 6.1% from the prior year. MedSurg and neurotechnology had 7.9% organic growth. Mako continues to have a growing install base as installations grew 19%. Orthopedics and spine grew 3.9% due to gains in procedure volumes in Europe, Canada, India and Japan.

Stryker provided updated guidance for 2022 as well. The company now expects organic revenue growth of 8% to 9%, up from 6% to 8% previously. Stryker now projects adjusted EPS will be in a range of $9.30 to $9.50 for the year.

Stryker has grown EPS at a rate of 11.6% per year in the past 10 years. It is likely the company can continue 10%+ annual earnings growth due to increased demand for Stryker’s products during the recovery from the pandemic.

Stryker has increased its dividend at an average rate of almost 12% per year over the past 10 years, though that growth has slowed somewhat in the medium term. The company raised its dividend by 10.3% for the Jan. 31, 2022 payment. It has now increased its dividend for 28 consecutive years. Shares currently yield 1.3%.

Based off of estimates for 2022, shares trades at 22.1 times earnings. We reaffirm our 2027 target price-earnings (P/E) of 24.5 to be more in line with the average valuation since 2012. If shares reverted to our target price-earnings ratio by 2027, then valuation would be an approximately 2% tailwind to annual returns over this time period. Overall, total returns could exceed 13% from EPS growth, dividends and an expanding P/E multiple.

Dover Corporation (DOV)

The logo for Dover (DOV) displayed on a smartphone screen.
Source: IgorGolovniov / Shutterstock.com

Dover Corporation (NYSE:DOV) is a diversified global industrial manufacturer with annual revenues of nearly $9 billion. Dover is composed of five reporting segments: engineered systems, clean energy and fueling, pumps and process solutions, imaging and identification, and climate and sustainability technologies. Slightly more than half of revenues come from the U.S., with the remainder coming from international markets.

On Aug. 5, 2021, Dover announced that it was raising its dividend 1% for the Sept. 15, 2021 payment, marking 66 consecutive years of dividend growth. This is the second-longest dividend growth streak among U.S. companies. Shares currently yield 1.6%.

The company is effectively managing inflation, while continuing to grow revenue. In the most recent quarter, revenue grew 6.4% to $2.16 billion, while adjusted EPS grew 3.9% year-over-year (YOY) to $2.14. Organic revenue remains high, with the company seeing a 7% increase in the second quarter. Engineered products increased 19% organically, as waste handling, vehicle services, and industrial winches and automation continue to see high demand. Dover’s backlog grew 30% YOY to $3.3 billion, implying continued growth in the coming quarters.

Dover reaffirmed guidance for 2022. Adjusted EPS are expected in a range of $8.45 to $8.65 with revenue projected to grow 8% to 10%. Dover also raised its organic growth forecast to 8% to 10% from 7% to 9% previously, indicating positive momentum to close out the year.

Dover’s EPS have compounded at 6% annually over the last decade. Growth has accelerated in the medium term, at an annual rate of more than 14% over the five years. Dover did suffer some setbacks during the worst of the Covid-19 pandemic, but the company has quickly rebounded. We maintain our expected earnings growth rate of 8% per year through 2027. The stock also appears to be undervalued, leading to total estimated returns above 13% per year over the next five years.

Polaris (PII)

A close-up shot of a Polaris (PII) all terrain vehicle.
Source: Ken Wolter / Shutterstock.com

Polaris (NYSE:PII) designs, engineers and manufactures snowmobiles, all-terrain vehicles (ATVs) and motorcycles. In addition, related accessories and replacement parts are sold with these vehicles through dealers located throughout the U.S. The company operates under 30+ brands including Polaris, Ranger, RZR, Sportsman, Indian Motorcycle, Slingshot and Transamerican Auto Parts. The global powersports maker, serving over 100 countries, generated $8.2 billion in sales in 2021.

Like many global manufacturers, Polaris is seeing elevated costs due to inflation, which is crimping margins. Fortunately, revenue continues to grow. In the most recent quarter, revenue grew 8% to $2.06 billion, while adjusted EPS declined 10% YOY. Still, the adjusted EPS figure of $2.42 for the quarter was 30 cents ahead of expectations. Marine and off-road segments grew 38% and 7%, respectively, to lead the way last quarter.

Supply chain constraints and inflationary pressures impacted results are being offset by higher prices. Polaris also provided revised guidance for 2022. For this year, the company now expects revenue to grow 13% to 16%. Adjusted EPS is now projected in a range of $10.10 to $10.30. This should easily cover the dividend and allow for continued dividend growth even while EPS stagnates.

Polaris has increased its dividend for 26 consecutive years. With a projected dividend payout ratio of 25% for 2022, the dividend payout seems secure. Polaris enjoys a competitive advantage through its brand names, low-cost production, and long history in its various industries, allowing the company to be the leader in ATVs and number two in snowmobiles and domestic motorcycles. This means Polaris can remain profitable, even during difficult operating environments.

The combination of 4% annual expected EPS growth, the 2.3% dividend yield and a significant boost from an expanding P/E multiple could fuel 13% expected annual returns over the next five years.

On the date of publication, Bob Ciura did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

Bob Ciura has worked at Sure Dividend since 2016. He oversees all content for Sure Dividend and its partner sites. Prior to joining Sure Dividend, Bob was an independent equity analyst. His articles have been published on major financial websites such as The Motley Fool, Seeking Alpha, Business Insider and more. Bob received a bachelor’s degree in Finance from DePaul University and an MBA with a concentration in investments from the University of Notre Dame.


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